As crude fell below $60 per barrel yesterday, dropping to 40 per cent of the record $147 peak scaled exactly a year ago, the International Energy Agency (IEA) said recovery in global oil demand would be delayed until next year. In rolling out its forecast for the coming year, the energy adviser to the industrialised world said next year's oil demand picture could look "dramatically different" from this year's, with consumption set to rebound by 1.4 million barrels per day (bpd) or 1.7 per cent to 85.2 million bpd.
But the IEA said a sharp decline in oil prices in the past two weeks suggested that observers who had "confidently announced the bottoming out of the recession" were having second thoughts. "The mood has suddenly changed, as many leading economic and energy indicators continue to show very weak readings, suggesting the 'green shoots' have been largely driven by a rebuild in industrial inventories rather than by a strong end-use demand."
Yesterday, crude extended a roughly 20 per cent slide from the eight-month high of $73.38 reached just last week, dipping as low as $59.01. "The number one factor is still demand. It all goes back to the economy," Ken Hasegawa, a commodity derivatives sales manager at the Newedge brokerage in Tokyo, told Bloomberg. "Destocking is probably largely over by now, yet demand data in key countries, predominantly the US, have if anything worsened in the past few weeks," the IEA said.
"We thus remain sceptical regarding the much-trumpeted, strong second-half 2009 demand rebound." The agency pointed to "growing evidence that, for a second year in a row, the driving season in the US is petering out". It said US motorists were feeling doubly pinched by the deep recession and increased prices at the petrol pump, causing them to drive less. "The sensitivity of US drivers to retail price fluctuations depends largely on their income prospects," it said.
US government data released on Wednesday showed that petrol inventories in the world's biggest energy consumer increased by 1.9 million barrels last week, while stockpiles of distillate fuel such as diesel swelled by 3.7 million barrels. The biggest surprise in the IEA's forecast for next year was its prediction of a "modest recovery" of about 100,000 bpd in oil demand by developed countries, as their economies "gradually emerge from their deepest slump in over half a century".
Less surprisingly, it said China and the Middle East would lead the larger expected rebound in global demand. The IEA's oil demand forecast for the developed world contrasts sharply with Opec's prediction. The oil exporters' organisation said on Tuesday that oil consumption in the developed world had peaked in 2005 and would continue to decline for at least the next two decades. The IEA said its forecast for next year was predicated on a gradual improvement in global financial and trade imbalances fuelling economic activity, notably in emerging countries. Should economic growth turn out to be "more subdued" than expected, the rebound in fuel demand would fail to materialise, it warned.
"There's still a strong note of caution. Demand data coming in for 2009 is still weak on a trend basis," said David Fyfe, the head of the IEA's oil industry and markets division. On the supply side, Opec members' slipping compliance with the deep output cuts they agreed to last year could soften the immediate outlook for crude prices. In June, the group delivered 2.9 million bpd of cuts, compared with 4.2 million bpd of reductions pledged since last September, according to the IEA.
It calculated that Opec compliance had fallen to about 68 per cent from nearly 80 per cent earlier this year, with production climbing by 75,000 bpd last month to 28.7 million bpd. "Opec crude oil supply in June rose for the second successive month despite a wave of supply disruptions in Nigeria," the agency noted. Anti-government militants in Nigeria have mounted a series of attacks on pipelines and other oil installations, forcing Africa's biggest oil exporter to curtail 300,000 barrels of crude production in recent weeks.
In total, nearly 1 million bpd of output capacity in the country's volatile Niger Delta region is currently offline, the IEA reported. Further damping immediate prospects for stronger crude prices, the IEA raised its forecast for oil supply from outside Opec, predicting growth of 190,000 bpd this year to 50.8 million bpd, instead of a 100,000 bpd drop. Next year, the agency sees a further 410,000 bpd rise to 51.2 million bpd, with "strong growth in Azerbaijan, Brazil, global biofuels, the US Gulf of Mexico and Canadian oil sands".